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Dayton drops business sales tax plan

Gov. Mark Dayton announces on Jan. 22 his $38 billion, two-year budget proposal. On Tuesday March 12, he will unveil changes in his proposal.

ST. PAUL -- It seemed as if pretty much no one liked Gov. Mark Dayton's proposal to tax business services, prompting him to overhaul a budget plan he presented six weeks ago.

Details of his new budget idea are due Tuesday.

Dayton on Friday told a TwinWest Chamber of Commerce meeting about his decision to dump the business tax, leaving those in the Capitol wondering what he might do to increase revenue he wants for programs such as education and economic development, as well as filling a budget deficit.

Republicans said the state needs no more money, so Dayton should not consider more taxes.

The Democratic governor plans to meet with key aides today to work out details of Tuesday's new budget plan.

After a Feb. 28 state budget report revealed a smaller-than-expected deficit, Dayton needed to tweak his budget. Now, after responding to widespread criticism about the business tax, he is expected to offer a more comprehensive change for the Democratic-controlled Legislature to consider.

Gone is a business-to-business sales tax that drew most of the ire. It would have been charged on services such as legal and accounting delivered to other businesses and consumers. Nearly every service would have been taxed under the original Dayton plan.

Dayton proposed to lower the sales tax rate from 6.875 percent to 5.5 percent begin collecting it on most services and adding a tax on clothing costing $100 or more.

@Sub heads:Tobacco tax

@Normal1: Also on Friday, Dayton said he probably will not pursue a cigarette tax increase he earlier wanted.

Democrats and Republicans both cheered Dayton's Friday tax announcement, which could leave the sales tax much as it is today.

Republicans and Democrats joined the Minnesota Chamber of Commerce in cheering elimination of the business-to-business proposal.

Freshmen Rep. Mary Sawatzky, DFL-Willmar, met with Dayton Thursday, one of several lawmakers to have private or small-group meetings with him in recent days.

"The budget issue I heard the most concern about was business-to-business taxes," Sawatzky said about town hall meeting she has held since Dayton announced his original budget plan. "The governor was very open to concerns and our ideas on how to best balance the budget."

House Speaker Paul Thissen, DFL-Minneapolis, said the Dayton business tax plan never had a chance to pass.

Thissen refused to say what he wants in a new budget plan other than continuing support on raising taxes on the state's highest earners.

The Chamber of Commerce and Republicans say that would hurt business.

"A continued concern is the governor's proposal to create a fourth tier in personal income-tax rates," the chamber said in an email to members. "Many businesses flow their income through the personal income tax. This tax increase will undermine their ability to invest in their employees and companies."

@Sub heads:Clothing tax

@Normal1: There was speculation that when Dayton dropped his business sales tax plan that he no longer would have enough money to fund a $500-per-homeowner property tax refund he sought.

Dayton spokeswoman Katharine Tinucci said that she expects him to drop his clothing sales tax request when he announces budget changes Tuesday.

Tinucci said Dayton plans to meet today with Revenue Commissioner Myron Frans and Commissioner Jim Schowalter of Minnesota Management and Budget to decide on a new tax plan, as well as other budget tweaks he may propose.

The income tax increase is expected to bring in an extra $1.1 billion and Dayton's original sales taxes changes would result in a $2 billion net revenue increase.

In his $38 billion, two-year budget proposal, the first order of business is to plug a $627 million gap (down from $1.1 billion earlier expected).

Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.